In Arbitration, Judge Thyself, Not the Process (Corporate Counsel)

October 3, 2014

“Control your own destiny, or someone else will.” Jack Welch's eight simple words of advice provide a compelling rationale for mediation as the optimal form of dispute resolution. As a former general counsel, my overwhelming preference was always to retain maximum control over outcomes via a mediation process. But what if parties are unable to find common ground and resolve their disputes? Does one maintain more control over the outcome with arbitration or litigation? Aaron Foldenauer, in his July 29 article in Corporate Counsel, makes the argument that arbitration creates big risks for companies and is “problematic for risk-averse corporations.” He also questions the oft-articulated advantages of arbitration - that it is cheaper, faster and more predictable than litigation - and concludes that corporations may be mistaken in mandating arbitration in contracts.

Foldenauer arrives at the wrong conclusion because he is condemning arbitration as a process based on its misuse or abuse. Of course, the same can be said of litigation and its misuse and abuse. In fact, to properly evaluate arbitration versus litigation one has to consider how the process performs when it is used properly - and the extent to which that can be controlled by the parties. Indeed, proponents of arbitration cite its ability to enable parties to arrive at a reasoned decision, based on applicable law, in a manner that is swifter, less costly and less disruptive than litigation. Of course, the same can be said of litigation. Litigation works well when it works well. Those who are of the same mind as Foldenauer contend that arbitration can be, and often is, more time-consuming and costly, and sometimes results in capricious and unappealable decisions that would not have occurred had the case been tried in court. The reality is that both are right.

Anyone who has litigated knows that there is nothing inherently quick, cheap or reliable about litigation. Litigation, in these times of increasingly scarce judicial resources, is an ever more lengthy process. Cases can, and often do, drag on for more than a decade. Time literally is money, as most costs rise by the hour and interest accrues on any potential damages. Discovery, and e-discovery in particular, seems to know no bounds. Costs are, likewise, unconstrained, and often so prohibitive that parties are unable to justify continuing, regardless of merit. And if you litigate to verdict, your destiny never can be entirely in your control. Indeed, the news is replete with stories of runaway verdicts, completely out of proportion to what most would consider reasonable. Of course, there is the ability to appeal, but a litigant can’t take comfort when it comes to predictability or timeliness of an appellate decision. And even if one ultimately prevails, if an opponent’s assets are in another country, one has to deal with the fact that the United States is not a party to any multilat- eral treaty for the recognition and enforcement of judgments.

Any meaningful analysis comparing the risks of arbitration versus those of litigation should not turn simply on whether either process can spin out of control. Surely we know the answer to that. It is the degree to which the parties can avoid a runaway process that is the key basis of comparison. In that regard, arbitration is a superior process. In arbitration, a significant degree of control over issues of cost and time and, to some extent, outcome resides with the parties. The foundation of the very real promise arbitration brings is the parties’ ability to shape a process that meets their needs; however, parties often fail to build upon that foundation.

Counsel, all too accustomed to a familiar litigation process in which the rules are set and the judge is assigned, often fail to take advantage of the fact that, when agreeing to arbitration, they have the ability to define a process tailored to their business needs. They overlook the fact that, as arbitration is largely a creature of contract, they have the ability to choose the skills of the neutral, the length of the proceeding, the scope of discovery, the resulting costs and an appellate process. And they are often unaware of the impact that an arbitral provider and the seat of arbitration can have on the proceeding.

In other words, many of the “flaws” of arbitration are entirely avoidable. This is not to say that arbitration is always the best approach. Thoughtful analysis of the relationships and issues likely to be at stake in a commercial transaction enable better choices regarding the dispute resolution process that best fits the parties’ objectives, both for the case itself and for the underlying commercial relationship. Assuming that the issue requires resolution by a third party (rather than by mediation), sometimes the answer should be litigation and sometimes the answer should be arbitration. But either way, having focused on their risks and objectives from the outset, parties are in a better position to manage the case in a manner that is more likely to lead to a favorable outcome.

That said, arbitration provides the parties with the opportunity to retain greater control than litigation, which is inherently constrained by the courts and the rules of procedure. Virtually all of the unquestionable challenges that litigation presents can be addressed by a properly managed or administered arbitration. Parties always have the option to select a neutral with specialized expertise that enables better and more efficient decision-making. The basis for decision-making can be defined. The scope of discovery - and its cost - can be expressly limited.

Some provider organizations, such as The Institute for Conflict Prevention and Resolution (where I now work), of- fer rules that enable parties to use expedited proceedings to address issues in a more efficient manner that reduces costs. Indeed, even when expedited proceedings are not specific, CPR administered arbitrations are designed to take no more than one year. And CPR requires under its rules that arbitrators apply the governing law and provide reasoned decisions. Parties concerned about the risk of a decision not legally grounded can provide for an appellate arbitral procedure. Finally, and importantly, the New York Convention enables recognition and enforcement of arbitral awards internationally.

If the parties can retain this kind of control over the arbitration process, one might ask: Why all the complaints, and what led Foldenauer to write his article? To find the answer, I would draw your attention to the immortal words of famed legal commentator Pogo: “We have met the enemy and he is us.” Legal training in the U.S. has not focused on the arbitral process, and few lawyers gain substantial experience with arbitral procedure in practice. Those who do are more likely to be litigators than to be the lawyers negotiating the deal that contains the arbitration agreement. And the lawyers negotiating the deal often give the arbitration agreement short shrift, waiting until the 11th hour and copying the clause from some other deal without considering how the terms fi the needs of the present parties.

Fortunately, all of this can be remedied. And the legal community has an obligation to do so. Outcomes are best shaped by business judgments and legal judgments. Whichever pathway is taken, there will never be any guarantees. Parties will lose cases they think they should have won. Losing parties will continue to disagree with judges, arbitrators and juries. But arguments that the process must be at fault are most often more convenient than valid. More importantly, when careful judgment is exercised, they are less likely to be needed.

Noah J. Hanft is President and CEO of the International Institute for Conflict Prevention and Resolution (CPR). Prior to joining CPR, he was General Counsel and chief franchise officer for MasterCard, Inc.